Hotel acquisition: share or asset deal?

Share purchase

In a share purchase, the buyer acquires ownership of the shares in the company which is carrying on the hotel business (the target company) and therefore of the target company itself. The purchase is made from the existing shareholders.

Advantages to acquiring a hotel via share purchase

• On a share purchase deal, stamp taxes due from the buyer will be restricted to a stamp duty (or stamp duty reserve tax) charge of 0.5% on the purchase price. Contrast this with stamp duty land tax payable on an asset purchase deal (charged at rates of up to 5%), it is clear why tax treatment is one of the main drivers behind share purchase deals.
• Simplicity is also a factor – a share purchase deal means that there will be no need to list out all the assets that are included and assets that are excluded (as is the case on an asset purchase deal).
• No assignment or transfer of the property is required (as would be the case on an asset purchase deal).
• If the property is leased, there will be no requirement to seek landlord consent.
• It is less disruptive to trading. Relationships with hotel suppliers, customers and bankers (among others) will transfer across automatically as assets of the target company whose shares are being acquired.
• Key operating licences (like the premises and marriage licence) will be unaffected by the transaction.
• If staff are employed by the hotel owner, that is, the target company, their employment is unaffected by the transaction; no TUPE consultation or other measures will be required. This is positive because such aspects can often impact the timing of a transaction.
• As neither a TUPE process nor landlord consent will usually be required, there is more chance of structuring the transaction as a simultaneous exchange and completion rather than having a gap between the two.
• Avoiding a split exchange and completion will remove the need for the buyer to pay a 10% deposit to the seller on exchange. This will likely benefit the cash flow of the buyer.

Disadvantages to acquiring a hotel via share purchase

• The target company is acquired ‘as is’ so there will be less opportunity for ‘cherry picking’ (as will often be carried out on an asset purchase deal).
• If the hotel is franchised or subject to a management agreement, the relevant brand consent will likely still be needed.
• Share purchase agreements place many obligations on the seller; the ability of the seller to stand behind those obligations will need to be considered carefully. Warranty and indemnity insurance is often used on property transactions of this nature to mitigate the risks but can be an added expense.
• Where the target company has multiple shareholders, the consent and involvement of all the target company’s shareholders will be required.
• As an entire company is being acquired, more extensive legal due diligence on the entire business will be needed and there are usually more issues to consider so costs are usually higher.
• On a share purchase deal, tax liabilities, filing obligations and other administrative burdens of the target company are inherited by the buyer. A tax indemnity is typically included to compensate the buyer for pre-completion tax liabilities.
• If target company’s assets were originally acquired for less than their market value, then at the date of the share purchase the target company will have latent gains that may crystalise if the assets were ever to be extracted from the target.
• Warranty and disclosure exercises are usually more extensive and onerous due to the nature of a share purchase transaction.
• It will lead to exposure to UK corporation tax on chargeable gains.
• The shareholders of a corporate seller will not receive sale proceeds directly. Such proceeds will need to be extracted from the company. The seller will need to consider the repatriation of the funds and any potential blockers to paying out post-sale dividends prior to commencing the transaction.

Asset purchase

In an asset purchase transaction (also known interchangeably as a business purchase), the buyer takes over the target business by acquiring a collection of specified assets and rights, and sometimes assuming responsibility for certain liabilities, which together comprise the target business.

The question of exactly which assets, rights and liabilities of the target business will be transferred to or assumed by the buyer as part of an asset purchase deal is a matter for the parties to negotiate.

Advantages to acquiring a hotel via asset purchase

• On an asset purchase deal, it is therefore easier to leave behind unwanted or problem assets, liabilities and contracts. This may be relevant where the hotel has been managed by a third-party manager who has negotiated contracts which relate not just to this hotel but to a wider portfolio of hotels. 
• For the purposes of calculating the base cost for capital gains tax (and corporation tax on chargeable gains), the assets will generally be treated as being acquired for the contractual purchase price. It is likely that this figure will be higher than the seller’s original acquisition price. The higher base cost can therefore be set against any proceeds arising from the buyer’s subsequent disposal of the assets. 
• Likely a cheaper, simpler and quicker transaction to be able to exchange than a share sale. However due to the possible TUPE process requirements or the need to seek landlord/ third-party consent, it may not be quicker to complete. 
• On an asset deal the seller may be more receptive to standing behind the warranties themselves thereby saving warranty insurance costs. This is because the warranties and the warranty process tend to be lighter on an assets deal. 
• No need for pre-sale corporate structuring to hive-up assets into a corporate vehicle in preparation for sale. The shape of the group does not therefore need to have been organised with a future exit transaction in mind.

Disadvantages to acquiring a hotel via asset purchase

• Stamp duty land tax is charged at rates of up to 5% on commercial property, whereas stamp duty on the transfer of shares is charged at just 0.5% on the purchase price. An asset purchase buyer will not usually inherit tax liabilities and so no tax input will be required on an asset purchase deal.
• Key hotel systems such as the guest management system, booking system, central services and support, together with accounting and payroll support systems are less likely to be included in the sale. A buyer will need time to identify replacement providers and is more likely to require a transitional services agreement for a period while it gets the hotel ‘on its feet’.
• A deal will need to be reached in respect of existing trade debts. Thought must be given as to whether these should be acquired by the buyer and whether the buyer is expected to pay for them. What rights or obligations will there be to collect any such trade debts post-completion and whose responsibility will it be?
• As a split exchange and completion is more likely with an asset sale, a buyer will likely need to fund the deposit at exchange (typically 10% of the purchase price). The risk associated with the period between exchange and completion will also need to be dealt with in the contract. The parties will need to comply with protections imposed by TUPE including running a consultation process, confirming any measures to be taken and a series of mutual indemnities in the asset purchase agreement. Where senior staff are engaged on a ‘cluster’ basis across several hotels, it will need to be determined whether they spend most of the time working for the hotel being sold or for other hotels.